"The long-term trend for AI and data centres is unchanged, but right now investors are worried that memory chip prices can rise sustainably," Hashizume added.
Geopolitical tensions also remained elevated, with U.S. President Donald Trump threatening a broader escalation in strikes on Iran.
Breadth was overwhelmingly negative, with 71 advancers in the Nikkei 225 against 152 decliners and two unchanged.
Kioxia was the index's biggest percentage loser, tumbling 16.1% for its steepest one-day decline since November 2025. It was followed by Sumco (3436.T), down 15.17%, and Screen Holdings (7735.T), which lost 12.04%.
AI euphoria in Japan is encapsulated in the fortunes of Kioxia, a once-struggling chipmaker whose market capitalisation briefly surpassed that of Toyota last month. But its share price has fallen more than 50% since then.
"I believe the market correction is dragging on as a reaction to the sharp rise that preceded it," said Shoichi Arisawa of Iwai Cosmo Securities. "That said, I don't think the business environment surrounding AI and semiconductor companies, or the current outlook for semiconductor demand, has changed."
Seven & I Holdings (3382.T) was among the top gainers in the Nikkei, rising 3.64% after the company said it was in talks to buy a stake in Polish convenience store operator Zabka Group (ZAB.WA).
Reporting by Rocky Swift, Junko Fujita, Norihiko Hirata in Tokyo; Editing by Harikrishnan Nair and Sherry Jacob-Phillips
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